Why Have Some States Introduced Defined Contribution Plans?

Source: Alicia H. Munnell, Alex Golub-Sass, Kelly Haverstick, Mauricio Soto, and Gregory Wiles, Center for Retirement Research at Boston College, SLP#3, January 2008

Although defined benefit plans dominate the state and local sector, in the last decade twelve states have introduced some form of defined contribution plan. The degree of compulsion varies among these states from mandatory participation in a defined contribution plan for new employees, to mandatory participation in both a defined benefit and defined contribution plan, to having the defined contribution plan only as an option…

…The most important explanation turns out to be political rather than economic. States where the same political party controlled the legislature and governorship and that party was republican were the most likely to introduce a defined contribution plan. The results also suggest that plans with a high percentage of union members and those with sizable employee contributions are less likely to add a defined contribution plan component. Interestingly, states without Social Security coverage, which provides a basic level of defined benefit protection, are not deterred from shifting to a mandatory defined contribution plan.

Leave a Reply